Prospects for US business remain strong; TP raised to Rs 824 from Rs 578; ‘Buy’ retained; re-rating likely after VAI for Unit IV
Aurobindo Pharma (Aurobindo) announced the USFDA has classified its injectable manufacturing facility Unit IV as VAI (Voluntary Action Indicated). Unit IV is an important injectable plant with dependence on future growth as it contributes ~18% of US sales (~9% of total sales). This removes the key overhang from the stock as Unit IV was issued 14 observations and is a critical plant for the company with 46 ANDAs pending for approval.
We remain positive on the stock considering its track record of continuously growing US generic business, wide product portfolio for US market, maintenance of margin profile even in challenging times and focus on deleveraging of balance sheet. Reiterate Buy and expect re-rating with key overhang behind us.
Unit IV classified as VAI: The VAI status means USFDA has accepted the company’s response to the observations. Now the company has to implement these additional measures on its own. USFDA had earlier inspected this facility in Nov’19 and issued 14 observations. This plant was later classified as VAI in Feb’20; however, VAI status was immediately rescinded. Final VAI status after getting 14 observations in an injectable unit provides confidence in company’s compliance mechanism.
US business to maintain growth momentum: Aurobindo has been able to consistently grow its US generic business, especially over the last 3-4 years when peers reported a decline in a challenging environment. We expect 5.9% revenue CAGR in US business over FY20e-FY22e led by 11.9% CAGR in injectables. We believe Aurobindo is well placed to monetise US opportunity given wide product basket of 181 pending ANDAs, huge manufacturing capacities and no significant product concentration risk.
Outlook: We expect Aurobindo to register 8.3% revenue and 12.1% PAT CAGR over FY20e-FY22e with Ebitda margin hovering around 20-21%. The company’s focus has been on FCF generation and debt repayment in the recent past. We expect annual debt reduction of $150-200 mn over next two years which would bring net debt to Ebitda down to 0.2x by FY21e and 0.0x by FY22e.
Valuations and risks: We raise target P/E (x) to 14x from 10x with clearance for unit IV, improving growth visibility and deleveraging of balance sheet. Considering attractive valuation of 10.9xFY22e EPS, we maintain Buy with a revised TP of Rs 824 based on 14xFY22e earnings (earlier: Rs 578). Key downside risks: regulatory hurdles, currency volatility, and delay in US launches.